Lesson-3-Financial-Statement-Analysis-class-copy.pdf

Lesson-3-Financial-Statement-Analysis-class-copy.pdf

2. LESSON 3 –
FINANCIAL STATEMENT
ANALYSIS

3. FINANCIAL STATEMENT ANALYSIS
Financialstatementanalysisistheprocessof
analyzingacompany’sfinancialstatementsfor
decision-makingpurposes.
Externalstakeholdersuseittounderstandthe
overallhealthofanorganizationandto
evaluatefinancialperformanceandbusiness
value.
Internalconstituentsuseitasamonitoringtool
formanagingthefinances.

4. OBJECTIVES OF FINANCIAL STATEMENT ANALYSIS
•Toassesstheoverallperformanceofthebusinessforagivenperiodoftimeasa
basisfortheownerormanagementinmakingpresentandfutureplansordecisions.
•Theresultsoftheanalysiscanthusbeusedtoevaluatetheperformanceofthe
differentmanagers.
•Theanalysisshouldbeabletodiscoverthestrengthsandweaknessesofthe
business
•TheanalysisshouldbeabletodeterminetheLIQUIDITY,STABILITY,PROFITABILITY
ANDEFFICIENCYofthebusiness

5. ANALYZE VS. INTERPRET
•ANALYZE–thefinancialstatementsimplymeanstodevelopFINANCIALRATIOS
•INTERPRET-meanstoexplaintheSIGNIFICANCEofthefinancialratiosdeveloped.

6. FINANCIAL STATEMENT ANALYSIS
Financialstatementanalysisisacriticaltoolfor
assessingthefinancialhealthandperformance
ofcompanies.
Ithelpsstakeholdersmakewell-informed
decisions,whethertheyareconsidering
investments,extendingcredit,ormanaginga
business.

7. FINANCIAL STATEMENTS ANALYSIS
Herearethekeycomponentsandstepsinvolvedinfinancialstatementanalysis:
1.GatherFinancialStatements:Obtainthecompany'sfinancialstatements,includingthebalance
sheet,incomestatement,andcashflowstatement.Thesedocumentsprovideasnapshotofthe
company'sfinancialpositionandperformanceoveraspecificperiod.
2.StudytheBalanceSheet:
•Assessthecompany'sassets,includingcurrentassets(e.g.,cash,accountsreceivable)and
long-termassets(e.g.,property,plant,equipment).
•Examineliabilities,bothcurrent(e.g.,accountspayable,short-termdebt)andlong-term(e.g.,
long-termdebt,deferredtaxes).
•Calculateandanalyzekeyratioslikethecurrentratio(currentassets/currentliabilities)and
debt-to-equityratio(totaldebt/shareholders'equity)toevaluateliquidityandleverage.

8. FINANCIAL STATEMENTS ANALYSIS
3.AnalyzetheIncomeStatement:
•Reviewrevenueandsalesfigurestounderstandthecompany'srevenue-generatingactivities.
•Examinethecostofgoodssold(COGS)andoperatingexpensestoassesscost
management.
•Calculateprofitabilityratiossuchasthegrossprofitmargin(grossprofit/revenue)andnet
profitmargin(netincome/revenue).
•Lookfortrendsandchangesinrevenueandexpensesovermultipleperiods.
4.EvaluatetheCashFlowStatement:
•Analyzecashflowfromoperatingactivitiestoassessthecompany'sabilitytogeneratecash
fromitscoreoperations.
•Examinecashflowfrominvestingactivities(e.g.,capitalexpenditures)andfinancingactivities
(e.g.,debtissuance,stockrepurchases)tounderstandinvestmentandfinancingdecisions.
•Assesschangesincashandcashequivalentsovertime.

9. FINANCIAL STATEMENTS ANALYSIS
5.CalculateandInterpretRatios:
•Usefinancialratiostogaindeeperinsightsintothecompany'sfinancialhealthand
performance.Commonratiosinclude:
•ReturnonAssets(ROA):Netincome/totalassets
•ReturnonEquity(ROE):Netincome/shareholders'equity
•EarningsPerShare(EPS):Netincome/numberofoutstandingshares
•Price-EarningsRatio(P/E):Stockprice/earningspershare
•DebtRatio:Totaldebt/totalassets
•OperatingCashFlowRatio:Operatingcashflow/totaldebt

10. FINANCIAL STATEMENTS ANALYSIS
6.ComparetoIndustryBenchmarks:Comparethecompany'sfinancialratiosandperformancemetricsto
industryaveragesandcompetitorstoidentifystrengths,weaknesses,andareasforimprovement.
7.AssessFinancialHealthandRisk:Evaluatethecompany'sfinancialhealthbyconsideringfactorssuchas
liquidity,solvency,profitability,andoperationalefficiency.Identifypotentialfinancialrisksandvulnerabilities.
8.IdentifyTrendsandAnomalies:Lookfortrendsandanomaliesinthefinancialstatements.Forexample,
suddenspikesindebtlevels,decliningprofitmargins,orinconsistentcashflowpatternsmaywarrantfurther
investigation.
9.ConsiderNon-FinancialFactors:Whilefinancialstatementanalysisprimarilyfocusesonnumbers,it's
importanttoconsidernon-financialfactorssuchasindustrytrends,competitivepositioning,management
quality,andmarketconditionsthatmayimpactthecompany'sfinancialperformance.
10.PrepareaReportorRecommendation:Summarizeyourfindingsandproviderecommendationsor
conclusionsbasedontheanalysis.Thisreportcanbeusedbyinvestors,creditors,orinternalmanagementto
makeinformeddecisions.

12. FINACIAL STATEMENT ANALYSIS

13. FINANCIAL STATEMENT ANALYSIS

14. FINANCIAL STATEMENT ANALYSIS

15. •FINANCIAL RATIO -is the ratio of one item in
the financial statement to another item in the
same financial statement
FINANCIAL RATIO

16. KINDS OF FINANCIAL RATIOS
•INCOME STATEMENT RATIO –the ratio of one item in the Income Statement to
another item in the same Income Statement.
e.g. RETURN ON SALES = Net Income / Net Sales
the ratio of net income to net sales

17. KINDS OF FINANCIAL RATIOS
•BALANCE SHEET RATIO –the ratio of
one item in the Balance Sheet to
another item in the same Balance Sheet.
e.g. CURRENT RATIO = Total Current
Assets / Total Current Liabilities
the ratio of total current assets to
total current liabilities

18. KINDS OF FINANCIAL RATIOS
•INTER-STATEMENT RATIO –the ratio of one item in the Income Statement to another
item in the Balance Sheet.
e.g. ACCOUNTS RECEIVABLE TURNOVER = Net Credit Sales / Average Accounts
Receivable*
* The Balance Sheet item must be the average of the beginning and ending balances

19. KINDS OF FINANCIAL RATIOS
•TREND RATIO –the ratio of
one item to the same item of
different periods
e.g. Ratio of sales this year to
the sales last year

20. RATIO ANALYSIS

21. USES OF THE RATIO ANALYSIS
•COMPARISONS
•Oneoftheusesofratioanalysisistocompareacompany’sfinancialperformanceto
similarfirmsintheindustrytounderstandthecompany’spositioninthemarket.
•Obtainingfinancialratios,suchasPrice/Earnings,fromknowncompetitorsand
comparingthemtothecompany’sratioscanhelpmanagementidentifymarketgaps
andexamineitscompetitiveadvantages,strengths,andweaknesses.
•Themanagementcanthenusetheinformationtoformulatedecisionsthataimto
improvethecompany’spositioninthemarket.

22. USES OF THE RATIO ANALYSIS
•TRENDLINE
Companiescanalsouseratiostoseeifthereisatrendinfinancialperformance.
Establishedcompaniescollectdatafromfinancialstatementsoveralargenumberof
reportingperiods.
Thetrendobtainedcanbeusedtopredictthedirectionoffuturefinancialperformance,
andalsoidentifyanyexpectedfinancialturbulencethatwouldnotbepossibletopredict
usingratiosforasinglereportingperiod.

23. USES OF THE RATIO ANALYSIS
•OPERATIONALEFFICIENCY
•Themanagementofacompanycanalsousefinancialratioanalysistodeterminethe
degreeofefficiencyinthemanagementofassetsandliabilities.
•Inefficientuseofassetssuchasmotorvehicles,land,andbuildingsresultsin
unnecessaryexpensesthatoughttobeeliminated.
•Financialratioscanalsohelptodetermineifthefinancialresourcesareover-or
under-utilized.

24. FINANCIAL RATIOS

25. FINANCIAL RATIOS

26. FINANCIAL RATIOS

27. FINANCIAL RATIOS

28. FINANCIAL RATIOS

29. FINANCIAL RATIOS